AM Best has maintained its stable outlook for the UK life insurance sector, citing favourable interest rates and a resilient pension risk transfer (PRT) market, despite geopolitical tensions and regulatory changes clouding the broader economic outlook, according to a market segment report published on Tuesday.
The credit rating agency identified the PRT market as the sector’s dominant growth driver. The market generated nearly £40 billion in premiums in 2025, and AM Best expects 2026 to be a record year for premium generation, driven largely by small and medium-sized transactions. Higher interest rates have improved the funding ratios of defined benefit pension schemes, making de-risking through PRT arrangements more affordable.
The report, however, highlighted a weakening economic backdrop. The International Monetary Fund revised its UK growth forecast for 2026 to 0.8%, down from an earlier estimate of 1.3%, citing higher energy prices linked to the US-Israel conflict with Iran and weak economic momentum in the second half of 2025. AM Best said demand for discretionary protection products is likely to decline as unemployment rises, although demand for pension products is expected to remain resilient.
On the regulatory front, the Pension Schemes Act, which received Royal Assent in April, introduced a minimum threshold of £25 billion in assets under management for default workplace pension scheme options. AM Best said barriers to entry are likely to remain high, with scale continuing to be a key determinant of success.
Funded reinsurance also remains under regulatory scrutiny. The Prudential Regulation Authority published proposals in April aimed at aligning charges for reinsurance recoverables with those applied to economically similar assets. AM Best said it expects the changes to reduce, but not eliminate, the use of funded reinsurance, with the impact varying across firms.
Stress testing under the 2025 Life Insurance Stress Test covered 11 of the UK’s largest life insurers. Following the stress scenarios, solvency capital requirements for all participants remained above 150%, while the impact of a reinsurer default scenario on solvency coverage would be limited to around 10 percentage points.
Most UK life insurers reported positive results in 2025. However, AM Best noted that comparisons between companies remain difficult because of differing approaches to assumptions under IFRS 17 and adjusted operating profit calculations. Increasing competition has also compressed new business margins, a trend the agency expects to continue amid sustained interest from private equity-backed market participants.
